bonds are securities issued by debtors, such as governments, enterprises and banks, in order to raise funds, and promise creditors to repay the principal and interest on a specified date. The essence of a bond is a certificate of debt, which has legal effect. There is a creditor-debtor relationship between bond buyers and issuers.

There are many kinds of bonds, which can be mainly divided into national debt, local debt and corporate debt according to the issuer. There are three ways for ordinary investors to participate in bond investment: subscription at the time of issuance, indirect holding through funds, and on-site trading through securities accounts.

Compared with investing in stocks, bonds have always been regarded as safer financial instruments. So, is there any risk in investing in bonds?

Mr. Zhang Huaqiao of Slow Bull Capital recently said on his blog that Russia is a paradise for bond investors and a hell for equity investors. According to the Economist magazine, after the default of foreign debt in 28, governments at all levels strictly stipulated the debt ceiling, which now only accounts for 2% of GDP.

however, Russia was not like this in the past.

On Monday, August 17th, 1998, the Russian government announced that they would postpone paying all the debts they owed. The Russian government has made a very simple decision. They will give priority to paying workers' wages and postpone the payment of the money repaid to western creditors, and will not support the ruble exchange rate in overseas markets. In short, they decided to let the ruble depreciate. Moreover, at least for a considerable part of the debts due, the Russian government has defaulted, and they have repeatedly promised that neither of these situations will happen! After a period of silence, the Russian government once again announced that it would postpone the repayment of debts due equivalent to 13.5 billion rubles. -

The event Gambler: The Rise and Fall of Long-term Capital Management Company dealt a fatal blow to Long-term Capital Management Company (LTCM). By September 1998, its assets had shrunk by 92%. Fearing that the failure of LTCM would cause a chain reaction in the financial system, the Federal Reserve had to carefully plan its rescue. Even so, because of its extremely high leverage, the liquidation of LTCM still brought serious chaos to the American financial market at that time.

this is probably one of the most classic cases about the risk of bonds.

Therefore, investing in bonds is not a percentage security. For ordinary investors, the risks of bonds are mainly reflected in three aspects:

The biggest risk of bond investment is the risk of default

The risk of default refers to the risk that the borrower who issues bonds cannot pay the interest or repay the principal on time, which will bring losses to bond investors.

many investors invest in bonds, giving priority to ensuring the safety of this machine. If the issuer goes bankrupt, or like the Russian government, let alone pay interest, and the principal can't be guaranteed.

according to Bloomberg statistics, the amount of default involved in the first four months of 219 reached 39.2 billion yuan, about 3.4 times that of the same period in 218. In the first quarter of 219, 49 bonds of 25 companies defaulted, involving 3.988 billion yuan of bonds, of which 1 entities defaulted for the first time were all private enterprises. According to the statistics of Guoxin Macro Dong Dezhi, as of April 29th, the number of first-time defaulting subjects (excluding SME bonds) in 19 years was 12, which was much lower than that in the third and fourth quarters of 218, but still greater than that in the same period of 218.

how to evaluate the risk of bonds? The most important thing is to look at the qualifications of bond issuers, financial status, whether there is guarantee when issuing bonds and other indicators.

generally speaking, the default risk of national debt is very small, followed by national debt and bonds issued by central enterprises;

The relative risks of local government bonds and urban investment bonds implicitly guaranteed by local governments are also relatively small, depending on regional economic differences and national policy support;

For ordinary corporate bonds, if the company's balance sheet is stable and its sustained profitability is good, then the safety factor will be high; Wholly state-owned and state-controlled enterprises may be safer than private enterprises.

Bonds with guarantee clauses are safer. The best guarantee is mortgage guarantee. If the issuer fails to pay the money, it can auction the collateral to get back the principal.

So many, it is still very difficult for ordinary investors to evaluate. For example, after the new chairman takes office, HNA bonds are disposed of in a big way. Is the risk of HNA bonds high? In fact, it is still difficult to evaluate.

Therefore, it is easier to refer to the data of bond rating agencies. When each bond is issued, a rating company that meets the requirements of the exchange will rate the main body of the bond and the security of the bond, and then make a follow-up rating every year. The higher the bond rating, the smaller the risk. Among them, the secured bond usually has a higher rating. (The following figure shows the default probability of different credit ratings considered by foreign rating agencies, and the image source: Road to Low Risk Investment)

Besides the rating, another indicator can be tracked: the benchmark coefficient of conversion rate.

The so-called conversion rate is a coefficient given to each bond by China Depository and Clearing Corporation, and the corresponding factor is that China Depository and Clearing Corporation provides bond repurchase business. The bonds held by investors can be pledged to Osama bin Laden, and he will evaluate how much money he can borrow according to the conversion rate, and then investors can borrow cash at a lower interest rate, which is equivalent to adding leverage without affecting the bond income.

Therefore, the conversion rate is the safety factor of bonds. The higher the conversion rate, the higher the natural safety of bonds.

income risk of bond investment

the income of direct investment in bonds comes from two parts: the coupon interest promised by the issuer and the income brought by price fluctuation in the trading market. One of the core indicators to measure bond returns is the yield to maturity (YTM), which refers to the rate of return of bonds compared with the current price. It reflects the monetary income of investors in various periods in the future when they invest in a bond at the current price.

because it involves discounting, yield to maturity's calculation is complicated, and usually it directly refers to the income data provided by some data terminals. The following figure shows the pre-tax income and after-tax income of some creditor's rights provided by the website of Ji Si Lu.

from the perspective of economics, interest rate is the compensation for future risks that investors have to bear. The market interest rate will change with the economic environment, liquidity and other factors. Bonds are legal contracts, and the coupon rate of most bonds is fixed. Therefore, the change of market interest rate will lead to the change of bond price and yield, which will bring uncertainty of income. Therefore, the longer the bonds purchased by investors are from the maturity date, the greater the possibility of interest rate changes and the greater the income risk.

generally, when the market interest rate rises, the bond price will fall and the bondholders' capital will suffer losses. Therefore, when the market interest rate is low, you should avoid buying long-term bonds.

Liquidity risk

Theoretically speaking, bonds in the stock exchange market are very liquid and can be traded and cashed at any time. However, there are regulations in the stock exchange that bonds that have suffered losses for two consecutive years will be suspended from trading. This will undoubtedly bring great liquidity risk.

although the suspension of trading is not a breach of contract, it will continue to pay back the money and pay interest, but once it is suspended by the exchange, it means:

the probability of default of this bond is much greater than that of other bonds;

the bond is likely to be downgraded by rating agencies;

moreover, when the bad news is released and the market sentiment is released in advance, the price of the secondary market may drop precipitously before the trading is suspended, and there is no chance to sell it at all, or it must bear high losses.

in addition, the trading volume of some bonds in the secondary market is very small, and the bid-ask spread is very large, which will also affect the liquidity of bonds. The following figure is a set of handicap data. The difference between buying and selling is very large, so the seller has to bear the loss of discount if he wants to make a deal. (Source: The Road to Low Risk Investment)

Therefore, when choosing bonds, you should try to choose bonds with large trading volume and active trading, which have higher liquidity.

when it comes to investment, it can't be 1% certain. The benefits are always in balance with the risks.

Above, the possible risks are briefly analyzed mainly for bonds that can be directly traded in the securities market. Compared with direct investment in bonds through the securities market, indirect investment in bond funds may be a simpler, easier and more reliable way for ordinary investors. Of course, it is still necessary to carefully choose the fund issuing company and the target of fund investment, and choose a more reliable fund for investment.